Elizabeth Warren on the Commercial Real Estate Sector
by Charles Lemos, Sat Feb 20, 2010 at 04:43:23 PM EST
The Congressional Oversight Panel's February oversight report, "Commercial Real Estate Losses and the Risk to Financial Stability," is now available for download (pdf). The report expresses concern that a wave of commercial real estate loan losses over the next four years could jeopardize the stability of many banks, particularly community banks. Commercial real estate loans made over the last decade - including retail properties, office space, industrial facilities, hotels and apartments - totaling $1.4 trillion will require refinancing in 2011 through 2014. Nearly half are at present "underwater," meaning the borrower owes more on the loan than the underlying property is worth. And as I reported back in late November, the commercial real estate mortgage default rate has risen to a 16 year high.
Here's the latest overview (4Q09) of the CRE market from Real Estate Econometrics, an industry group that tracks the CRE sector:
Rising Default Rates
The national default rate for commercial real estate mortgages held by depository institutions rose from 2.88 percent in the second quarter of 2009 to 3.40 percent in the third quarter. Over the same period, the multifamily mortgage default rate increased by 44 basis points, rising from 3.14 percent to 3.58 percent. These increases are consistent with reeconometrics' projections for the commercial mortgage default trajectory in 2009.
Variation Across Banks; Concentration Risk
The analysis shows that banks with similar concentrations in commercial real estate may exhibit marked differences in delinquency and default rates. In particular, an analysis of loan performance at the 5,015 institutions with the largest exposures to commercial real estate shows no statistically significant relationship between concentration and default rate.
Increases in Non-Accrual Balances
The balance of commercial mortgage loans 30 to 89 days past due increased from $12.7 billion to $13.2 billion between the second and third quarters. The balance in default, which includes mortgages 90 days or more past due and loans in non-accrual status, increased by $5.7 billion, to $37.1 billion.
Reeconometrics projects that the default rate for bank-held commercial mortgage will rise to 4.0 percent by year-end 2009 and will peak in 2011. The largest losses will occur at regional and community banks, principally due to higher concentrations in commercial real estate. At 29.0 percent, commercial real estate concentrations are greatest among banks with $100 million and $1 billion in assets.